Inverted Yield Curves and Stock Market Performance : Recent Evidence

This study investigated the linkage between the effects of an inverted yield curve and the performance of small, mid, and big cap stocks for the period 2005-2007. The comparative performance of small, mid and big cap stocks during the period was examined. In general, there seemed no significant link between the two variables, which would support the efficient market hypothesis. However, as an anomaly, the biggest cap stocks significantly outperformed the middle and the smallest cap stocks when the yield curve was inverted. This could reflect an economic environment in which the pendulum may have swung in favor of the big cap stocks